Академический Документы
Профессиональный Документы
Культура Документы
Consumer equilibrium means that condition, which gives him/her maximum utility from full
use of income.
The consumption decision of a rational consumer is motivated by the desire to maximise
utility or satisfaction. But this decision is constrained by his limited purchasing power. Given
the assumptions about consumer's preferences, we can draw the indifference curves showing
different levels of satisfaction. Three such indifference curves, I0, I1, I2 are drawn in Figure
3.27. The budget line AB contains commodity bundles which are purchasable. The
consumption bundles like a, b, c lying on the budget line AB are purchasable. The consumer
will choose that commodity bundle which lie on the highest indifference curve. The
consumption bundle b on indifference curve I1 is the obvious choice because the alternative
commodity bundles such as a and c are located on lower indifference curve I0. The
indifference curve lying above I1, such as I2. consists of commodity bundles which are not
attainable with the given budget line AB.
The consumption choice of b from among alternative consumption bundles maximises the
utility subject to purchasing power limitations specified by the budget line. The consumer is
in equilibrium at point b because he has no incentive to choose any other commodity bundle.
Note that consumption choice at b contains OX0 amount of good X and 0Y0 amount of good
In Figure 3.31, the budget line has a constant slope. The initial budget line as well as income
level is indicated by M0 and the corresponding consumption choice by commodity bundle a. If
income rises to M1, the budget line have a parallel rightward shift to M1 and the new
consumption choice is shown by the commodity bundle b. The diagram shows that bundle b
contains more of both X and Y than bundle a. Therefore, income rise leads to a rise in the
equilibrium consumption of both X and Y. If we imagine many equilibrium consumption choices
like a. b starting from the origin and lying on an upward-sloping curve OE, we have a complete
picture of how equilibrium consumption plan changes with the change in the level of income.
The upward-sloping line OE is the income-consumption curve (ICC).
The real life Engel curve need not always be straight line. In general, when income rises, the
consumption of a good may rise by a proportion greater than or less than the rise in income. The
Engel curve in Figure 3.39, is convex from below, implying that X/M rises as M rises.
A luxury is defined as a good for which the proportion of income spent (EXIM) rises with the rise
in income. A necessity is defined as a good for which (EXIM) falls as income rises. On average,
the proportion of income spent on food decreases (i.e., the proportion of income spent on nonfood items increases) with the increase in income.
20. Price - consumption curves and derivation of demand curve.
(a) Momentary: In the momentary period or the very short run supply is fixed and E, is zero.
(b) Short run: In the short run supply can be varied with the limit of the present fixed assets
(buildings. machines. etc.). Thus E, in the short run is generally low.
(c) Long run: In the long run all factors may be varied and firms may enter or leave the industry.
Perfect price discrimination (1st degree) suppose that for each particular buyer it will set
a particular price. Perfect price discrimination can be only if the monopoly firm knows
the consumer demand curve and sell each unit of good at the demand price (at the higher
price which the consumer is able to buy a certain quantity of goods). By knowing the
reservation price, the seller is able to sell the good or service to each consumer at the
maximum price he is willing to pay, and thus transform the consumer surplus into
revenues. So the profit is equal to the sum of consumer surplus and producer surplus. The
marginal consumer is the one whose reservation price equals to the marginal cost of the
product. The seller produces more of his product than he would to achieve monopoly
profits with no price discrimination, which means that there is no deadweight loss.
Examples of where this might be observed are in markets where consumers bid for
tenders, though, in this case, the practice of collusive tendering could reduce the market
efficiency.
2nd degree price discrimination consist in the setting of the same price for all
consumers, but differ in relation with the quantity purchased. Larger quantities are
in which at least one factor of production is fixed and firms can usually gain some abnormal
profit.
The firm will produce quantity Qs at price Ps. The firm produces where marginal cost (MC) and
marginal revenue (MR) curves meet, because MC is the cost of producing an one more of the
good and MR is the revenue of selling one more good and their meeting point is the most
efficient production. This means that the shaded area between Ps, ACs (average cost of
producing one good at this quantity) and the AR curve (average revenue curve) is the abnormal
profit the firm makes. AR is equivalent to the demand curve and is the average revenue the firm
makes per item sold. Producing at this point ensures the highest amount of profit. Thus,
equilibrium is created in the short run.
54. Long-run equilibrium under monopolistic competition.
Monopolistic Competition is a market structure featuring few large and many small firms, fairly
low entry barriers similar goods and relatively high competition. The long-run period is when all
factors of production are variable. In the long run, there are no abnormal profits because of the
features of Monopolistic competition. There are a few large firms, but many small firms that will
compete for profit and thus drive the price down. Also, low entry barriers mean new firms will
enter the market and further add competition. Finally, the goods are similar enough to ensure that
competition will always remain high.
In this diagram, the firm produces where the LRMC, or long run marginal cost curve, and the
marginal revenue curve meets. The LRMC describes the cost of producing one more of the good
when no factors of production are fixed over the long run. That point is, in the long run,
equivalent to the LRAC, or long run average cost curve, which shows them average cost of
producing one good at this quantity over the long run. Because the LRAC curve is above the AR
curve, there is no abnormal profit, as the average cost of the good equals the average revenue of
the good. Thus, in the long run, equilibrium is acquired.
55. Monopolistic competition and economic efficiency. Excess capacity.
Monopolistically competitive markets are less efficient than perfectly competitive markets. In
terms of economic efficiency, firms that are in monopolistically competitive markets behave
similarly as monopolistic firms. Both types of firms' profit maximizing production levels occur
when their marginal revenues equals their marginal costs. This quantity is less than what would
be produced in a perfectly competitive market. It also means that producers will supply goods
below their manufacturing capacity. Firms in a monopolistically competitive market are price
setters, meaning they get to unilaterally charge whatever they want for their goods without being
influenced by market forces. In these types of markets, the price that will maximize their profit is
set where the profit maximizing production level falls on the demand curve.This price exceeds
the firm's marginal costs and is higher than what the firm would charge if the market was
perfectly competitive. Regardless of whether there is a decline in producer surplus, the loss in
consumer surplus due to monopolistic competition guarantees deadweight loss and an overall
loss in economic surplus.
Excess capacity. The difference between the quantity of products which correspond with the
minimum level of long-run average cost and the quantity of products offered by the firm in
conditions of long-run equilibrium is called excess capacity of firm production